Inflation and unemployment are two of the most important economic variables that affect the quality of our daily lives.Based on the principles of supply and demand, the two have an inverse relationship, where high unemployment rates, implicates low inflation rates and vice versa.
The country’s unemployment rate, or the percentage of citizens of legal age to work who are not currently employed, is a vital rate used by governments to measure the health of a country’s economy.
In October 2017, Jamaica recorded its lowest unemployment rate in a decade at 10.4 percent which indicated that there have been positive changes in the performance of the economy.
Jamaicans are reeling at the fall in unemployment, especially since a large part of the fall is due to the rise in youth employment. However, it is essential to note that this fall in unemployment will eventually lead to a rise in inflation, and more significantly so if the unemployment rate falls below the natural rate of unemployment.
While an increase in the number of employed residents is something to cheer about, the country has to ensure that the pace of growth does not exceed a pace that cannot be sustained. An unemployment rate below the natural rate suggests that the economy is growing faster than its maximum sustainable rate in the short-term. This can create a domino effect which will see upward pressure on wages and prices, in general, leading to increased inflation.
This is evident in the upwards trend of the inflation rate between 2002 and 2017 where the average inflation rate was 9.41 percent. The latest recorded rate was 5.20 percent in October, which indicates a rise since the third quarter of the 2017.
Following a decade long record low rate in unemployment, Jamaicans must beware of the high possibility of rising prices. Inflation has negative impacts on every group in society and cannot be easily corrected.
It has been noted that the current international market slump is inducing anxiety and fear among investors. Analysts theorise that the increase in wages in a tight U.S. labour market (forcing a rise in inflation) is one of the triggers for the fall in indices. Therefore, until the government is capable of reducing unemployment while keeping inflation rates low using stable monetary and fiscal policies, inflation is inevitable.
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